Avensys (AVNY) 10QSB Quarterly report (small business)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-QSB

[X]	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	FOR THE QUARTERLY PERIOD ENDEDDECEMBER 31, 2004
	OR
[   ]	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from to

COMMISSION FILE NUMBER 000-33199

C-CHIP TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)

NEVADA	88-0467848
(State of other jurisdiction of incorporation)	(IRS Employer Identification Number)

4710 St. Ambroise
Suite 227
Montreal, Quebec
Canada H4C 2C7
(Address of principal executive offices)

(514) 337-2447
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes [X]   No [   ]

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PART I.

ITEM 1. - Financial Statements

C-Chip Technologies Corporation
(A Development Stage Company)
Consolidated Financial Statements
December 31, 2004

	Index
Consolidated Balance Sheets	F-1
Consolidated Statements of Operations	F-2
Consolidated Statements of Cash Flows	F-3
Notes to the Consolidated Financial Statements	F-4

-2-

C-Chip Technologies Corporation
(A Development Stage Company)
Consolidated Balance Sheets
(expressed in U.S. dollars)
	December 31	June 30,
	2004	2004
	$	$
	(unaudited)	(audited)
ASSETS
Current Assets
Cash	530,080	1,561,020
Accounts receivable, net of allowance for doubtful accounts of $12, 809 and
$5,805, respectively	308,293	237,384
Inventory	135,932	155,680
Note receivable from a related party (Note 7(b))	391,654	417,899
Other current assets	107,869	45,554
Total Current Assets	1,473,828	2,417,537
Property and Equipment (Note 5)	83,002	82,274
Goodwill (Note 4(a))	107,000	107,000
Other Intangible Assets (Note 6)	365,865	447,125
Total Assets	2,029,695	3,053,936
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Bank loan (Note 11)	158,824	221,490
Accounts payable	114,127	165,362
Accrued liabilities	262,233	232,705
Due to related parties (Note 7(a))	138,320	230,726
Total Current Liabilities	673,504	850,283
Total Liabilities	673,504	850,283
Contingencies and Commitments (Notes 1 and 11)
Stockholders' Equity
Common Stock, 100,000,000 shares authorized with a par value of $0.00001;
40,650,359 and 39,595,803 issued and outstanding, respectively	407	396
Additional Paid-in Capital	9,325,737	8,536,780
Deferred Compensation	(91,481)	(25,974)
Accumulated Other Comprehensive Income (Loss)	(280,980)	9,860
Deficit Accumulated During the Development Stage	(7,597,492)	(6,317,409)
Total Stockholders' Equity	1,356,191	2,203,653
Total Liabilities and Stockholders' Equity	2,029,695	3,053,936

(The Accompanying Notes are an Integral Part of the Consolidated Financial Statements)
F-1

-3-

C-Chip Technologies Corporation
(A Development Stage Company)
Consolidated Statements of Operations
(expressed in U.S. dollars)
	Accumulated
	from
	June 26, 2000	For the		For the
	(Date of	Three Month		Six Months
	Inception) to	Ended		Ended
	December 31,	December 31,		December 31,
	2004	2004	2003	2004	2003
	$	$	$	$	$
Revenue
Net product revenue	405,564	43,305	148,036	195,342	148,036
Net service revenue	1,824,225	505,556	-	993,549	-
Total Revenue	2,229,789	548,861	148,036	1,188,891	148,036
Cost of Revenue
Product	207,086	24,736	66,447	104,599	66,447
Service	1,275,570	339,481	-	716,218	-
Cost of Revenue	1,482,656	364,217	66,447	820,817	66,447
Gross Margin	747,133	184,644	81,589	368,074	81,589
Operating Expenses
Depreciation and amortization	318,994	46,604	44,116	93,038	88,232
Selling, general and administrative	2,946,291	387,444	518,576	837,354	644,971
Acquired in-process research and
development	650,000	-	-	-	-
Impairment of goodwill	278,852	-	-	-	-
Research and development	558,281	159,881	6,526	195,625	58,061
Stock based compensation(1)	1,387,343	183,850	118,005	511,559	164,584
Total Operating Expenses	6,139,761	777,779	687,223	1,637,576	955,848
Loss from Operations	(5,392,628)	(593,135)	(605,634)	(1,269,502)	(874,259)
Other Income and Expense
Interest expense	47,482	5,428	-	10,581	2,397
Debenture accretion	136,325	-	-	-	16,625
Discount on conversion of debt	1,418,451	-	-	-	1,418,451
Net Loss Before Discontinued Operations	(6,994,886)	(598,563)	(605,634)	(1,280,083)	(2,311,732)
Loss from Discontinued Operations (Note 12)	(602,606)	-	-	-	-
Net Loss	(7,597,492)	(598,563)	(605,634)	(1,280,083)	(2,311,732)
Comprehensive Loss (Note 10)	(7,878,472)	(749,553)	(605,634)	(1,570,904)	(2,311,732)
Net Loss Per Share - Basic and Diluted		(0.01)	(0.02)	(0.03)	(0.07)
Weighted Average Shares Outstanding		40,282,000	32,400,000	40,020,000	31,700,000
(1) Stock based compensation is excluded
from the following:
Selling, general and administration	1,387,343	183,850	118,005	511,559	164,584

(The Accompanying Notes are an Integral Part of the Consolidated Financial Statements)
F-2

-4-

C-Chip Technologies Corporation
(A Development Stage Company)
Consolidated Statements of Cash Flows
(expressed in U.S. dollars)
		For the Six Months
		Ended December 31,
		2004	2003
		$	$
Cash Flows To Operating Activities
Net loss		(1,280,083)	(2,311,732)
Adjustments to reconcile net loss to cash
	Stock based compensation	511,559	164,584
	Expenses settled with issuance of common shares	-	164,397
	Discount on conversion of debt	-	1,418,451
	Depreciation and amortization	93,038	88,232
	Accretion of debenture		16,625
Changes in operating assets and liabilities
	(Increase) in accounts receivable	(24,153)	(33,775)
	(Increase) in inventory	2,137	(25,932)
	(Increase) in other assets	(62,315)	(24,957)
	Increase in accounts payable and accrued liabilities	27,348	11,450
Net Cash Used In Operating Activities		(732,469)	(532,657)
Cash Flows From Investing Activities
	Purchase of property and equipment	(12,506)	(6,681)
	Payment received on note receivable	71,090	-
Net Cash Provided By Investing Activities		58,584	(6,681)
Cash Flows From Financing Activities
	Borrowing on bank credit line	(96,151)	-
	Related party advances	(124,889)	(73,213)
	Proceeds from issuance of common shares, net	-	1,115,500
	Proceeds from exercise of stock options	147,293	26,502
Net Cash Used In Financing Activities		(73,747)	1,068,789
Effect of Exchange Rate Changes on Cash		(283,308)	-
Increase (Decrease) in Cash		(1,030,940)	529,451
Cash - Beginning of Period		1,561,020	8,505
Cash - End of Period		530,080	537,956
Non-Cash Financing and Investing Activities
	Issuance of common shares for settlement of promissory note	-	500,000
	Issuance of common shares for convertible debenture	-	966,722
	Issuance of stock options for debt settlement	64,608	-
Supplemental Disclosures
	Interest paid	10,581	-
	Income taxes paid	-	-

(The Accompanying Notes are an Integral Part of the Consolidated Financial Statements)
F-3

-5-

C-Chip Technologies Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2004
(Expressed in U.S. Dollars)
1.	Nature of Operations and Continuance of Business
	The Company was incorporated in the State of Nevada on June 26, 2000 as Keystone Mines Limited.
	On January 7, 2003 the Company acquired assets and intellectual property and changed its business focus to the development of security technology and changed its name to C-Chip Technologies Corporation. On February 17, 2004, the Company expanded the scope of its business by acquiring Canadian Security Agency (2004) Inc., ("CSA" or "subsidiary") a company providing guard and security services in Montreal, Canada. (Refer to Note 4).
	The Company's shares trade on the NASD OTC Bulletin Board under the symbol CCHI.
	Initial product sales have commenced however the Company continues to make significant engineering improvements and remains in the development stage. The ability of the Company to emerge from the development stage with respect to its planned principal business activity is dependent upon its successful efforts to commercialize its development of products and patents on a consistent and ongoing basis, attaining profitable business operations, and/or raising additional equity financing.
	The Company has experienced significant operating losses since inception. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded assets amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company has funded itself through issuance of shares or by loans from shareholders and/or directors. During the next twelve months the Company plans to fund its operations through cash on hand, the sale of security services, the sale of products and through cost re-imbursements. If profitable operations are not achieved, additional financing will be required to pursue the Company's business plan. These factors raise substantial doubt regarding the Company's ability to continue as a going concern.
2.	Summary of Significant Accounting Policies
	a)	Fiscal Year
		The Company's fiscal year-end is June 30.
	b)	Basis of Accounting
		These financial statements are prepared in conformity with accounting principles generally accepted in the United States and are presented in US dollars.
	c)	Principles of Consolidation
		These consolidated financial statements include the accounts of Canadian Security Agency (2004) Inc., a wholly-owned subsidiary incorporated in Quebec, Canada. All inter-company accounts and transactions have been eliminated.
	d)	Cash and Cash Equivalents
		The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.

F-4

-6-

C-Chip Technologies Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2004
(Expressed in U.S. Dollars)
2.	Summary of Significant Accounting Policies (continued)
	e)	Long-Lived Assets
		In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life.
		Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.
	f)	Foreign Currency Transactions/Balances
		The Company's reporting currency is the U.S. dollar and its functional currency is the Canadian dollar. Occasional transactions occur in U.S. dollars, and management has adopted SFAS No. 52, "Foreign Currency Translation". Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at rates of exchange in effect at the balance sheet date. Average rates for the year are used to translate revenues and expenses. Resulting translation gains and losses are accumulated in a separate component of stockholders' equity as accumulated other comprehensive income or loss.
	g)	Use of Estimates
		The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
	h)	Recent Accounting Pronouncements
		In December 2004, FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29". The guidance in APB Opinion No. 29, "Accounting for Nonmonetary Transactions", is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. SFAS No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Early application is permitted and companies must apply the standard prospectively. The adoption of this standard is not expected to have a material effect on the Company's results of operations or financial position.

F-5

-7-

C-Chip Technologies Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2004
(Expressed in U.S. Dollars)
2.	Summary of Significant Accounting Policies (continued)
	h)	Recent Accounting Pronouncements (continued)
		In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123R, "Share Based Payment". SFAS 123R is a revision of SFAS No. 123 "Accounting for Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees" and its related implementation guidance. SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123R does not change the accounting guidance for share-based payment transactions with parties other than employees pr ovided in SFAS 123 as originally issued and Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services". SFAS 123R does not address the accounting for employee share ownership plans, which are subject to AICPA Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans". SFAS 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period (usually the vesting period). SFAS 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liabi lity instruments issued. The scope of SFAS 123R includes a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Public entities (other than those filing as small business issuers) will be required to apply SFAS 123R as of the first interim or annual reporting period that begins after June 15, 2005. Public entities that file as small business issuers will be required to apply SFAS 123R in the first interim or annual reporting period that begins after December 15, 2005. For nonpublic entities, SFAS 123R must be applied as of the beginning of the first annual reporting period beginning after December 15, 2005. The adoption of this standard is not expected to have a material effect on the Company's results of operations or financial position.
	i)	Financial Instruments
		Financial instruments include cash, bank loans, accounts receivable, note receivable, accounts payable, accrued liabilities, and related party payables. The fair values approximate their carrying values due to the immediate or short-term maturity of these financial instruments.
	j)	Net Loss Per Share
		The Company computes net loss per share in accordance with SFAS No. 128, "Earning per Share" (SFAS 128). SFAS 128 requires presentation of both basic and diluted net loss per share (EPS) on the face of the income statement. Basic net loss per share is computed by dividing the net loss for the year by the weighted average number of shares of common stock outstanding during the year. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of shares of common stock and potential common stock outstanding during the period, if dilutive.

F-6

-8-

C-Chip Technologies Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2004
(Expressed in U.S. Dollars)
2.	Summary of Significant Accounting Policies (continued)
	k)	Stock-Based Compensation
		The Company has elected to apply the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). Under the intrinsic value method of accounting, compensation expense is recognized if the exercise price of the Company's employee stock options is less than the market price of the underlying common stock on the date of grant. Stock-based compensation for employees is recognized on the straight-line basis over the vesting period of the individual options. Stock options granted to non-employees are accounted for under Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS 123), which establishes a fair value based method of accounting for stock-based awards, and recognizes compensation expense based on the fair value of the stock award or fair value of the goods and services received, whichever is more reliably measurable. Under the provisions of SFAS 12 3, companies that elect to account for stock-based awards in accordance with the provisions of APB 25 are required to disclose the pro forma net income (loss) that would have resulted from the use of the fair value based method under SFAS 123.
		During the six month period ended December 31, 2004, the Company granted 1,654,956 stock options pursuant to a non-qualified stock option plan at exercise prices ranging from $0.00001 to $0.91 per share. Stock options granted to non-employees totalled 614,956 of which 384,956 have vested. Stock options granted to employees vest over a period of one year.
		The fair value of the options granted during the period was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: risk free interest rate of 1.84%, expected volatility of 122%, an expected option life of 1.2 years and no expected dividends. The weighted average fair value of options granted was $0.54 per share. Had the Company determined compensation cost based on the fair value at the date of grant for its employee stock options, the net loss would have increased by $664,447 for the six months ended December 31, 2004.
		During the six-month period ended December 31, 2004, the Company recognized stock-based compensation for non-employees in the amount of $363,559.
		The following table illustrates the effect on net loss per share as if the fair value method had been applied to all grants of stock options:
				Three months ended		Six months ended
				December 31,		December 31,
				2004	2003	2004	2003
				$	$	$	$
		Net loss -- as reported		(598,563)	(605,634)	(1,280,083)	(2,311,732)
		Add: Stock-based compensation expense
			included in net loss -- as reported	183,850	118,005	363,559	164,584
		Deduct: Stock-based compensation expense
			determined under fair value method	(413,516)	(261,407)	(1,028,006)	(383,524)
		Net loss -- pro forma		(828,229)	(709,036)	(1,944,530)	(2,530,672)
		Net loss per share (basic and diluted) -- as
			reported	(0.01)	(0.06)	(0.03)	(0.07)
		Net loss per share (basic and diluted) -- pro
			forma	(0.02)	(0.06)	(0.05)	(0.08)

F-7

-9-

C-Chip Technologies Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2004
(Expressed in U.S. Dollars)
2.	Summary of Significant Accounting Policies (continued)
	l)	Revenue Recognition
		The Company's C-Chip technology is still in the development stage and has generated limited commercial sales of products. The Company developed prototypes for testing by potential customers, which were billed for a portion of the costs incurred. The Company recorded these cost recoveries when paid as a credit to the respective expense in the statement of operations. Commercial product sales are recorded when shipped as part of a sales agreement, usually by customer purchase order. Certain product sales contain a small charge for after sales service for up to one year; such amounts are deferred and recognized as revenue when earned. Products carry a one-year replacement warranty and there is insufficient warranty experience on which to establish a warranty reserve during the development stage.
		Sales of security services commenced on the acquisition of Canadian Security Agency (2004) Inc. during fiscal 2004. Clients are provided ongoing personnel and products based upon service agreements with revenue recognized as services are performed.
		The Company continually monitors timely payments and assesses any collection issues. The allowance for doubtful accounts is based on the Company's detailed assessment of the collectibility of specific customer accounts. Any significant customer accounts that are not expected to be collected are excluded from revenues.
		The Company recognizes revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue Recognition in Financial Statements." Revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectibility is reasonably assured.
	m)	Property and Equipment
		Property and equipment are recorded at cost. Amortization is calculated on the declining balance method, except for the leasehold improvements where the straight-line method is used, at the following annual rates or period:
			Computer equipment	30%
			Furniture	20%
			Leasehold improvements	5 years
			Machinery and equipment	20%
	n)	Inventory
		Inventory consists of finished products available for sale to customers and components. Inventory is valued at the lower of cost and net realizable value. Cost is determined on a weighted average cost basis.
	o)	Purchased Intangible Assets
		An acquired intangible asset that represents technology that has reached technological feasibility is capitalized at cost. Amortization is calculated using the straight-line method over four years commencing in the first quarterly period following acquisition. Acquired in-process research and development is charged to operations on acquisition.

F-8

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C-Chip Technologies Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2004
(Expressed in U.S. Dollars)
2.	Summary of Significant Accounting Policies (continued)
	p)	Acquired Goodwill
		Goodwill represents the excess of the purchase price of acquired assets over the fair values of the identifiable assets acquired and liabilities assumed. Pursuant to SFAS No. 141, the Company does not amortize goodwill, but tests for impairment of goodwill on an annual basis and at any other time if events occur or circumstances indicate that the carrying amount of goodwill may not be recoverable. Circumstances that could trigger an impairment test include but are not limited to: a significant adverse change in the business climate or legal factors; an adverse action or assessment by a regulator; unanticipated competition and loss of key personnel. Goodwill is tested for impairment using present value techniques of estimated future cash flows; or using valuation techniques based on multiples of earnings. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is charged to operations.
	q)	Contingent Consideration
		In connection with the Company's acquisition of Canadian Security Agency (2004) Inc., if certain future internal performance goals are later satisfied, the aggregate consideration for the acquisition will be increased. Such additional consideration, if earned, will be paid in the form of additional shares of the Company's common stock now held in escrow. Any additional consideration paid will be allocated between goodwill, stock-based compensation expense and deferred compensation. The measurement, recognition and allocation of contingent consideration are accounted for using the following principles:
		Measurement and Recognition
		In accordance with SFAS No. 141, Business Combinations ("SFAS 141"), contingent consideration is recorded when a contingency is satisfied and additional consideration is issued or becomes issuable. The Company records the additional consideration issued or issuable in connection with the acquisition when a specified internal performance goal is met. For additional consideration paid in stock, the Company calculates the amount of additional consideration using the closing price of its common stock on the date the performance goal is satisfied.
		Amount Allocated to Goodwill
		In accordance with EITF No. 95-8, Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination ("EITF 95-8") and FIN 44, the portion of additional consideration issuable to holders of unrestricted common stock and fully vested options as of the acquisition date is recorded as additional purchase price, as the consideration is unrelated to continuing employment with the Company. Such portion is allocated to goodwill.
		Amount Allocated to Stock-Based Compensation Expense
		In accordance with EITF 95-8, the intrinsic value associated with additional consideration related to stock or options that vest between the acquisition date and the date at which the contingency is satisfied is recorded as an immediate charge to stock-based compensation expense because the consideration is related to continuing employment with the Company.
		Amount Allocated to Deferred Compensation
		Additional consideration related to options and restricted stock that remain unvested when the contingency is satisfied is recorded as deferred compensation expense under EITF 95-8 and FIN 44, as such consideration will only be earned to the extent that the holder of such options or restricted stock continues to be employed by the Company and meets the vesting requirements. The amount recorded as deferred compensation is based upon the intrinsic value of the restricted stock and unvested options at the date at which the contingency is satisfied. The Company amortizes such deferred compensation over the remaining vesting period of the underlying restricted stock and unvested options. In the event that a holder does not fully vest in the restricted stock or unvested options, the unamortized portion of deferred compensation is eliminated.

F-9

-11-

C-Chip Technologies Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2004
(Expressed in U.S. Dollars
2.	Summary of Significant Accounting Policies (continued)
	r)	Income Tax
		Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company has adopted SFAS No. 109 as of its inception and has incurred net operating losses. Pursuant to SFAS 109 the Company is required to compute tax asset benefits for net operating losses carried forward. Potential benefit of net operating losses have not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years.
	s)	Shipping and Handling Costs
		The Company's shipping and handling costs are included in cost of sales.
	t)	Reclassifications
		Certain reclassifications have been made to the prior year's financial statements to conform to the current period's presentation.
	u)	Interim Financial Statements
		These interim unaudited financial statements have been prepared on the same basis as the annual financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company's financial position, results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period.
4.	Acquisition of Canadian Security Agency (2004) Inc.
	a)	Consideration Paid
		On February 17, 2004 the Company acquired all the issued and outstanding shares of Canadian Security Agency (2004) Inc. ("CSA") in exchange for 1,600,000 restricted common shares of the Company. CSA is in the business of providing guard and security services in Montreal, Canada. Pursuant to the terms of the acquisition agreement, 600,000 shares were released on closing and 1,000,000 shares were held in escrow as contingent consideration related to revenue targets and repayment of a note receivable. The note receivable, originally in the amount of $473,271, is due from the seller on or before February 17, 2005. The released shares were recorded at their fair value of $468,000. The Company used the purchase method of accounting for the CSA acquisition as at February 17, 2004.
		Allocation of Purchase Price:
			Note receivable	$	473,271
			Accounts receivable		149,328
			Advances from the Company		(203,897)
			Property and equipment		8,347
			Bank indebtedness		(93,567)
			Accounts payable		(74,488)
			Accrued liabilities		(176,846)
			Goodwill		385,852
			Total Consideration	$	468,000

F-10

-12-

C-Chip Technologies Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2004
(Expressed in U.S. Dollars
4.	Acquisition of Canadian Security Agency (2004) Inc. (continued)
	a)	Consideration Paid (continued)
		The Company performed an annual impairment assessment of the carrying value of the goodwill recorded in connection with the CSA acquisition in June 2004 as required under SFAS No. 142. In accordance with SFAS 142, the implied fair value of goodwill was determined in the same manner as that which is utilized to estimate the amount of goodwill recognized in a business combination.
		The Company estimated the fair value of its CSA reporting unit primarily using the discounted cash flow method. The discounted cash flows for CSA were based on discrete five year financial forecasts developed by management for planning purposes and consistent with those distributed to the Company's Board of Directors.
		Upon completion of the June 2004 annual impairment assessment, the Company determined the carrying value of the CSA reporting unit exceeded its estimated fair value. As a result, the Company charged operations with a goodwill impairment loss of $278,852 during fiscal 2004.
		The primary factors resulting in the impairment charge were: (i) the loss of some customers due to consolidation in the industry and new ownership of CSA which affected both the Company's operations at that time and its expectations with respect to future revenue, (ii) lower revenue growth projections based on performance to date.
	b)	Accounting for Contingent Consideration
		In connection with its acquisition of Canadian Security Agency (2004) Ltd., the Company reserved additional shares of its common stock for issuance to a former shareholder of the acquired company upon satisfaction of certain future internal performance goals.
		The following table presents activity in the Company's common stock reserved for issuance upon satisfaction of future internal performance goals related to the purchase of CSA:
			Shares
			#
		Balance at June 30, 2004	700,000
		Shares reserved for certain future internal performance goals	-
		Shares earned - valued at $148,000	(200,000)
		Shares cancelled	-
		Balance at December 31, 2004	500,000
		The following table presents the allocation of contingent consideration earned in connection with the satisfaction of the internal performance goals of CSA and payment received to reduce the note receivable (Refer to Note 7(b)):
			$
		Allocation of contingent consideration earned	148,000
		Goodwill	-
		Stock-based compensation expense	148,000
		Deferred compensation	-
		Total	148,000
		See Note 2(q) for a detailed explanation of the accounting policy relating to the measurement, recognition and allocation of contingent consideration.

F-11

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C-Chip Technologies Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2004
(Expressed in U.S. Dollars
5.	Property and Equipment
							December 31,	June 30,
							2004	2004
							Net Book	Net Book
						Accumulated	Value	Value
					Cost	Amortization	$	$
					$	$	(unaudited)	(audited)
	Computers				62,050	16,996	45,054	40,532
	Leasehold improvements				5,075	2,032	3,043	3,551
	Furniture				12,778	4,609	8,169	9,215
	Machinery and equipment				38,952	12,216	26,736	28,976
	Total property and equipment				118,855	35,853	83,002	82,274
	Depreciation during the period						11,778	14,936
6.	Intangible Assets
							December 31,	June 30,
							2004	2004
							Net Book	Net Book
						Accumulated	Value	Value
					Cost	Amortization	$	$
					$	$	(unaudited)	(audited)
	C-Chip technology				574,285	251,230	323,055	394,835
	Patents and trademarks				75,990	33,180	42,810	52,290
	Total other assets				650,275	284,410	365,865	447,125
	Amortization during the period						81,260	162,520
	The amortization of the remainder of the C-Chip technology, patents and trademarks is as follows:
	2005		$	81,260
	2006			162,520
	2007			122,085
			$	365,865
7.	Related Party Transactions/Balances
	a)	The Company has received management services from officers and shareholders. These related parties also paid certain operating expenses on behalf of the Company and advanced funds for working capital. The total amount due to officers and/or shareholders at December 31, 2004 is $138,320 (June 30, 2004: $230,726). The amounts due are non-interest bearing, unsecured, and have no fixed terms of repayment.
	b)	The note receivable from a related party is unsecured, non-interest bearing and due on or before February 17, 2005. The note receivable is due from the original owner and current President of Canadian Security Agency (2004) Inc., and is delinquent subsequent to the period end. The Company expects to collect the note in full.

F-12

-14-

C-Chip Technologies Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2004
(Expressed in U.S. Dollars
8.	Common Stock
	a)	During the three months ended December 31, 2004, the Company issued 809,282 common shares for total proceeds of $131,292 from the exercise of stock options.
	b)	During the three months ended September 30, 2004, the Company issued 245,274 common shares for total proceeds of $16,001 from the exercise of stock options.
9.	Stock Options and Warrants
	a)	Stock Options
		i)	During the three month period ended December 31, 2004, the Company granted 349,682 stock options to consultants pursuant to a non-qualified stock option plan at exercise prices ranging from $0.00001 to $0.75 per share. A total of 809,282 stock options were exercised for proceeds of $131,292 and 15,000 were cancelled during this period. Stock options granted vest over a period of one to three years.
		ii)	During the three month period ended September 30, 2004, the Company granted 1,040,000 stock options to employees pursuant to a non-qualified stock option plan at exercise prices ranging from $0.20 to $0.91 per share. An employee exercised a total of 40,000 stock options during the period. Stock options granted to employees vest over a period of one year.
		iii)	During the three month period ended September 30, 2004, the Company issued 265,274 stock options to non-employees of which 165,274 vested immediately at exercise prices ranging from $0.0001 to $0.68 per share. A total of 80,274 stock options were issued to vendors to settle outstanding payables in the amount of $64,608. During the period non-employees exercised 205,274 stock options. Stock-based compensation to non-employees in the amount of $178,452 was charged to operations.
	b)	Warrants
		Common share purchase warrants issued with the private placements of common shares during the year ended June 30 2004, and outstanding at December 31, 2004 are as follows:
		i)	3,873,637 warrants exercisable at $1.00 each; with expiration dates ranging from August 2005 through February 2006.
		ii)	2,538,462 warrants exercisable at $1.10 each and expiring in April 2006.

F-13

-15-

C-Chip Technologies Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2004
(Expressed in U.S. Dollars
10.	Comprehensive Loss
	The Company's accumulated other comprehensive income consists of the accumulated net unrealized gains or losses on foreign currency translation adjustments. At December 31, 2004 the Company had an accumulated foreign currency translation loss of $280,980.
	The components of comprehensive loss are as follows:
			Period from
			June 26, 2000	For the		For the
			(Date of	Three Months		Six Months
			Inception) to	Ended		Ended
			December 31,	December 31,		December 31,
			2004	2004	2003	2004	2003
			$	$	$	$	$
			(unaudited)	(unaudited)	(unaudited)	(unaudited)	(unaudited)
	Net loss		(7597,492)	(598,563)	(605,634)	(1280,084)	(2,311,732)
	Foreign currency translation
		adjustment	(280,980)	(150,989)	-	(290,820)	-
	Comprehensive loss		(7,878,472)	(749,552)	(605,634)	(1,570,904)	(2,311,732)
11.	Contingencies and Commitments
	CSA has bank indebtedness of $158,824 at December 31, 2004 within a Corporate Credit Line facility in the amount of Cnd$400,000, fluctuating with cash flow and collection of accounts receivable. Interest is charged at Canada bank prime plus 2% per annum. The facility is secured by a movable hypothec over accounts receivable and inventory of CSA; unlimited personal guarantee by the former sole owner of CSA, supported by collateral second mortgage on his personal residence and subrogation of the shareholder loan and salary bonus.
12.	Discontinued Operations
	Discontinued operations consist of the Company's former activities in mineral exploration. In December 2002 the Company's Board of Directors approved the termination of mining activity and the acquisition of C-Chip Technology.
13.	Segment Disclosures
	The Company adopted SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information", during the current year resulting from the acquisition of CSA in February 2004. Reporting segments are based upon the Company's internal organization structure, the manner in which the Company's operations are managed, the criteria used by the Company's chief operating decision-maker to evaluate segment performance, the availability of separate financial information, and overall materiality considerations.

F-14

-16-

C-Chip Technologies Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2004
(Expressed in U.S. Dollars
13.	Segment Disclosures (continued)
	The C-Chip Technology segment consists of security devices. The CSA Services segment consists of security services.
		C-Chip	CSA	Consolidated
		$	$	$
	Net Revenues from External Customers	195,342	993,549	1,188,891
	Cost of Net Revenues	104,599	716,218	820,817
	Gross Margin	90,743	277,331	368,074
	Operating Expenses			1,637,576
	Other Income and Expense			10,581
	Net Loss for the six months ended December 31, 2004			1,280,083
		C-Chip	CSA	Consolidated
		$	$	$
	Net Revenues from External Customers	43,305	505,556	548,861
	Cost of Net Revenues	24,736	339,481	364,217
	Gross Margin	18,569	166,075	184,644
	Operating Expenses			777,779
	Other Income and Expense			5,428
	Net Loss for the three months ended December 31, 2004			598,563
	The Company has one geographic business area: North America. No single customer accounted for 10% or more of consolidated revenue.
14.	Subsequent Events
a)	On January 21, 2005, the Company completed the acquisition of Markus 360, an asset management software solution designed to control and monitor the movement of assets within one or many premises. The purchase price of $125,000 was satisfied by the issuance of 164,474 restricted shares of our common stock. The purchase agreement requires the Company to pay the seller a royalty of 10% of future gross revenue of the software, up to a maximum of $1,000,000, over a 5 year period. In parallel, the Company entered into an agreement with Multi-Hexa Laval Inc. for the distribution of Markus 360 in Canada.
b)	On February 16, 2005, the Company entered into a Purchase Agreement with eighteen institutional and accredited investors (the "Investors") under the terms of which the Company agreed to issue Units consisting of (i) an aggregate of $4,675,000 of the Company's 9.0% Senior Secured Convertible Notes, Series A, which are convertible into shares of the Company's Common Stock, par value $0.00001 per share, (ii) Series E warrants to purchase an aggregate of 5,394,202 shares of Common Stock (subject to adjustment) for a period of five years at an exercise price of $.75 per share (subject to adjustment); and (iii) Series F warrants to purchase an aggregate of 1,798,042 shares of Common Stock (subject to adjustment) for a period of one year at an exercise price of $.70 per share (subject to adjustment).

F-15

-17-

C-Chip Technologies Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2004
(Expressed in U.S. Dollars)
	c)	On February 22, 2005, the Company announced the acquisition of Chartrand Laframboise Investigation ("CLI") of Montreal Canada, and all businesses related to CLI, including Commercial Business Bureau Inc. The purchase price was $3,000,000CND (US$2,439,000) and a US$1,394,000 convertible debenture with a coupon of 9% and a 5 year maturity date. At the option of the holders, the debenture is convertible into 1,700,000 shares of our common stock at price of $0.82 per share.

F-16

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ITEM 2.     MANAGEMENTS' DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

Overview of our Business

Since our acquisition in January 2003 of a technology designed to enable users to remotely access, control and manage different type of equipment, our operations are in the risk management field.

In February 2004, to ensure that we would also be able to provide risk management services to businesses and institutions, we purchased Canadian Security Agency (2004) Inc. ("CSA"), a private Montreal-based business established in 1984 that offers security services to large and medium-sized corporate accounts. Our security services now include guards, surveillance, investigation, undercover and electronic monitoring operations. This is a business segment that provides stable and recurring revenues and, by having access to an already established clientele, we believe it offers our company potential cross marketing opportunities for the security solutions that we have developed and are now beginning to market. This is a business strategy that we intend to pursue further.

Currently, the security industry is estimated to be generating $100 billion in revenue in North America alone, growing at annual rate of 15% per year according to industry experts. With thousands of companies presently in operations, the security industry is highly fragmented and, in our view, prone to consolidation. We have already concluded two acquisitions in 2005, one pertaining to the purchase of certain assets, essentially a risk management software solution, the other being a marquee name in the Canadian security industry. We have also identified different other potential acquisitions in the security sector and we are currently in discussions with a number of interesting candidates to conclude a transaction. Any acquisitions related announcements will be made public when, in our opinion, a transaction has been secured.

To that effect, on February 16^th 2005, we announced the conclusion of private placement of $4.675 million with eighteen institutional and other accredited investors. To complete the financing, we issued to investors a senior secured convertible debenture carrying an initial coupon of 9%. The debenture is payable over 24 months in cash or in shares at a discount of 15% to market price and, at the option of holders, can be converted at any time into common shares at a fixed price of $0.65 par share. As part of the private placement, we also issued to investors warrants to purchase an aggregate of 5,394,202 shares of our common stock for a period of five years at an exercise price of $0.75 per share; and warrants to purchase an aggregate of 1,798,042 shares of our common stock for a period of one year at an exercise price of $0.70 per share. This new capital provides our Company the initial means to begin implementing our acquisition strategy in the risk management industry.

In January 2005, this acquisition strategy was initiated with the purchase of Markus 360, an asset management software solution designed to control and monitor the movement of assets within one or many premises. As partial consideration, we paid $125,000 for Markus 360 which was satisfied by the issuance of 164,474 restricted shares of our common stock and we agreed to pay the seller a royalty of 10% based the future on gross revenue of the software, up to a maximum of $1,000,000 over a 5 year period. In parallel, we also entered into an agreement with Multi-Hexa Laval Inc. for the distribution of Markus 360 in Canada.

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Initially developed for transport companies, Markus 360 offers a total solution for asset management. Easy to use, Markus 360 provides businesses and institutions with an instantaneous global view of their equipment and other fixed or moveable assets such as tools and inventory, on or off premises, even in transit. It provides users with a detailed inventory display and offers the history of any goods, tools or equipment, by employee, department or project. While not material to our overall operations, we believe the acquisition of Markus 360 will contribute to accelerate the development and marketing of another asset management solution using wireless communications and RFID technology which we are currently developing. The later will provide businesses and institutions a cost-effective solution to control, manage and monitor in real-time the movement of assets and personnel within one or many premises with alert notification in case of exception. We expect such risk management solution will find signifi cant applications in the security industry.

Of potentially more significance in the short term, on February 22^nd 2005, we announced the acquisition of Chartrand Laframboise Investigation ("CLI"), one of Canada's leading investigation firms. As consideration for the acquisition for all businesses related to CLI, including the Commercial Business Bureau Inc., we agreed to pay $3 million Canadian cash (US$2,439,000) and issued to the sellers a convertible debenture of US$1,394,000 carrying a coupon of 9% with a 5 year maturity date. At the option of holders, the said debenture is convertible into 1,700,000 shares of our common stock at price of $0.82 per share. In parallel, we also entered into employment agreements with the principals of CLI. It's President and Chief Executive Officer, Mr. Jean Talbot, has agreed to a minimum term of 18 months, whereas it's Chairman of the Board and Chief Operating Officer, Mr. Louis Laframboise has agreed to a minimum term of 36 months.

Founded in 1986, CLI is now considered the standard in the field of investigative services in Canada. CLI`s track record is outstanding and includes over one thousand satisfied clients. As leader in the industry, CLI has for objective to remain the authority in private investigation and security by providing clients specialized and customized services to ensure their global protection. CLI's principal services include investigation, surveillance, undercover agents, background verification, business intelligence and labor management conflict. CLI is one of the major partners of Investigations Canada whose expertise is available throughout Canada, with 9 partners, 25 locations and over 200 private investigation and security professionals. We plan to draw on CLI and its outstanding management to lead our foray in the security industry. The mandate of CLI is clear: Growth through acquisitions starting from East to West and then, from North to South.

To determine suitable candidates, our management is following the criteria set forth below:

*	Strength of management
*	Actual revenues and profitability
*	Market leadership and reputation
*	Extent and quality of relationship with customers
*	Potential synergies and cross-marketing opportunities
*	Acquisition price representing a minimum discount of 100% to its value when in a public entity

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We are targeting on one side companies offering well-established security services for their ability to provide stable and recurring revenues and profits and, on the other side, companies providing new and innovative security solutions with a rapidly growing revenue base and offering the potential for substantial growth ahead. We believe this strategy is the one most likely to maximize the value of our shareholders.

Our Security Services

Since 9/11 and its aftermath, world events have reinforced our opinion that the security industry offers significant opportunity for growth and our goal is to quickly attain a leading position within this industry, both from internal growth and through acquisitions.

As a first step, in February 2004, we purchased CSA a private Montreal-based business established in 1984 that provides security services to corporations and public institutions. Albeit small, CSA has built a solid reputation for the quality of its services with clients in both the private and public sectors. While CSA can offer its clients a wide range of security services under different agreements with third parties, most of its business is derived from the provisioning of security officers.

With our recent acquisition of CLI, we can now offer our clients a wide portfolio of security services, including security officers, investigation, surveillance, business intelligence, background verification and labor management conflict. In all, we currently have approximately 100 full-time employee, about 50 other available on as needed basis and we have access to wide range of resources in North America and abroad.

Security Officers

We currently employ over sixty five security officers assigned for the most part in office buildings, commercial and industrial centers. Their mission consists of providing quality protection services, combined with courteous customer service to our clients. Our security officers all possess the necessary qualifications to work with complex and multi-purpose high-tech security systems.

Investigations

Our security services also involve the provisioning of highly specialized expert investigators with long-standing experience in the art of investigation and research. We can offer our clients with external investigations, internal investigations and other related services. The external investigations include fraud, insurance and workers' compensation, in-house theft, productivity problems, inventory protection and drug trafficking. The internal investigations are mainly concerned with research, pre-employment checks, criminal files and due diligences.

Since our acquisition of CSA results have been essentially as expected. Through a series a measure to lower cost and improve customer services initiated in the spring of 2004, we are now seeing growth in revenue and improved profitability. Our security service is a business segment where we intend to achieve significant growth, both internally and through acquisitions. Our recent acquisition of CLI was a first step in that direction and other are likely to follow.

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Our Security Solutions

The security solutions that we have developed and that we are currently introducing to the market on a commercial basis are within the "telemetric" field. Within this business segment, our focus is on the development of technological solutions designed to provide business users risk management tools to monitor, protect and increase the safety of remote assets. Our current solutions are related to the automotive sector but our technology could also be applied to other type of assets such industrial equipment or office products.

Telemetric refers to the ability to remotely access, control, locate and manage different products or services. The telemetric sector is a new and emerging industry poised for explosive growth over the next 3-5 years. Available and planned applications by the industry include location-based and navigation services, info-tainment services, automatic emergency callout in the event of an accident, security and anti-theft systems, remote diagnostics and repair, logistics and fleet management, and office applications.

Essentially, we develop solutions which use integrated wireless communications, RFID technology, transaction processing, software applications and the Internet, and when location is required, Global Positioning System (GPS) technology to enable users to efficiently access, control, manage and monitor remote assets.

Our solutions are designed to be easy-to-use and cost-effective. We allow our customers to use our website to remotely access, control, locate and monitor different types of equipment or services, essentially for increased security. We believe our security solutions provide significant value to business users by increasing the efficiency of their operations and lowering their costs.

Within the security sector, our core technology is readily applicable as a credit and asset management solution. Because there is a large, readily available market for telemetric applications for automotive products, management has positioned its initial product solutions toward this industry.

Our current product solutions include:

1. The Credit-Chip: The Credit-Chip is a unidirectional communication benefit-denial receiver that can be incorporated into any vehicle. It offers the credit grantor, using a simple web-based application, the ability to "turn on" / "turn off" leased or financed vehicles by connecting a C-Chip sensor to the starter. The Credit-Chip is designed as a security solution enabling credit grantor the ability to enforce schedule of payment and to prevent usage of vehicles for which payments are not remitted.
2. The SHADOW Series: This product has the same capabilities as the Credit-Chip, but adds two-way communication as well as GPS location / tracking and other monitoring features. Additional options can include notification of excess speed, notification in case of theft and, starter and fuel pump interrupt, - all requests are charged to users on a pay-per-use basis. Our SHADOW is very small - about the size of a cigarette pack and is one of the lowest priced tracking devices available on the market today. Versatile in its design, the SHADOW offers different security applications for businesses. As the Credit-Chip, the SHADOW can be used by credit grantor to enforce schedule of payment - the perfect tool for mid to high-end vehicles where credit grantor may want to repossess the vehicles rapidly in case of defaults in payment to minimize any loss in value of the vehicles. The SHADOW can also be used by insurance companies to locate and immobilize a stolen asset and, hence, increase the likeliness of a rapid re covery, the later

-22-

impacting positively on the sums to be disbursed to policy holders and, in turn, on return on capital. Finally, the SHADOW can be used by any businesses having a fleet of vehicles on the road to monitor routes followed, time spent at customer's premises, to increase dispatching efficiencies, all contributing to increased revenue and lowered operating costs.

3. The HAWK Series: Our basic product is a wireless anti-theft device that uses RFID technology to identify authorized users. RFID technology enables the identification of authorized users through the use of radio frequency. A transponder is attached to the key chain that talks to a wireless switch. If the transponder does not talk to the switch, the power sport vehicle will not start. To improve the security features of the HAWK, a tilt sensor and alarm can easily be added. Specifically developed for power sport vehicles, the HAWK is considered to be amongst the best anti-theft device available on the market today.
4. The FALCON Series: This product is specifically design for automotive goods. It is also a wireless anti-theft device that uses RFID technology to identify authorized users. RFID technology enables the identification of authorized users through the use of radio frequency. A transponder is attached to the key chain that talks to wireless switches. If the transponder does not talk to the switches, the car will not start. Switches can be installed to the starter, fuel pump, transmission, ignition, doors lock, or any combination thereof. As wireless links are used, they are virtually impossible to locate since they can be installed almost anywhere in the vehicle.

We have targeted our initial security solutions to the large automotive sector, but our basic technology has applications to a variety of assets which span several business sectors including industrial equipment, office equipment and consumer electronic products. Our R&D team is currently working on expanding the potential applications of our technology. In parallel, we are continuously on the look out to acquire technology and/or product solutions that would be complementary to our current product offerings, or that we could potentially leverage through our existing customers.

In terms of actual achievements, our security solution business segment produced disappointing results in the quarter ended December 31, 2004. Different reasons accounted for our lack of performance in this segment. First, it has become apparent that our distribution model which is based on agreements with third parties does not work as effectively as our management had anticipated. To rely on third parties whose priorities and objectives are not necessarily synchronized with ours is not most effective. Further, our sales in this segment are generally made at high levels of decision and we believe the best way to handle the process is with direct account executives. Although initially more expensive as there is an immediate impact on our direct cost, we believe the building a small but effective direct sales team will lead to much improved results. In time, as we begin leveraging the existing clientele of security service business and develop cross-selling opportunities, we believe this can only lead to m uch better results.

Second, where we had potentially substantial orders, as our Company was beginning shipments, we encountered technical difficulties impacting on the long term reliability of our products. As opposed to deliver products which may have proved later to be faulty and, given the difficulty and expenses related with the replacements of installed units, our management took the conscious decision of stopping shipments until the technical issues identified were corrected. This along with customization requirements from potentially important customers has seriously limited our capacity to generate meaningful revenue in the said period. As other emerging companies, we are finding that our sales force has a tendency to market solutions in development as opposed to current and available products, all causing delays in our ability to deliver actual results.

-23-

Definitive measures to improve our sales and marketing approach and our ability to deliver product solutions of the highest quality are now being implemented and, although we are now on the right track, we expect that the above issues will continue to impact our results in the current quarter. These measures have included last January the appointment of Mr. Guy Chevrette as Chief Operating Officer of our Company. Mr. Chevrette brings to us more than 20 years of management and business development experience in the high-technology sector. He is a seasoned business executive with a strong technical background in information technology applied to wireless data communication used to improve enterprise asset management. Mr. Chevrette now oversees product development, production and testing, as well as marketing and sales of our current solutions in the security sector. We believe the addition of Mr. Chevrette to our management team will be extremely helpful toward the attainment of our future success.

On the positive side, despite the difficulties we encountered, our customers have been most comprehensive and have in fact reacted positively to the way our Company has handled the situation. We can now safely say that our current solutions geared toward the financial industry have certainly passed the stage of commercial proof of concept. This reflected by strong indications of interest toward our solutions from potentially large customers and, as soon as our Company has corrected still outstanding issues, substantial revenue are expected to be achieved from our security solutions.

Results of Operations

Our revenue for the three and six months ended December 31 2004 was $548,861 and $1,188,891. C-Chip technology products accounted for revenue of $43,305 and $195,342 compared to $148,036 and $148,036 in 2003. Service revenues from CSA were $505,553 and $993,549 for the three and six months ended December 31, 2004. Gross margin for the three and six months ended December 31 2004 was $184,644 and $368,074. Our net loss for the three and six months ended December 31, 2004 was $598,562 and $1,280,083 (2003 - $605,634 and $2,311,732). We remain a development stage company with a prime focus on commercializing technology acquired in 2003.

Operating expenses for this quarter were $777,779 compared to $687,223 for the same period in 2003. Selling, General and Administration expenses, which exclude stock based compensation of $183,850 compared to $118,005 in the prior year period, were $387,444 compared to $518,576 reflecting reduced marketing and consulting expenses. Research and development expenses for the three months ended December 31 2004 were $159,881 compared to $6,526 in 2003. Due to the nature of our emerging business none of the 2004 results are indicative of future results.

Financial Condition, Liquidity and Capital Resources

The Company is engaged in the development and the marketing of security products and providing security services through Canadian Security Agency (2004) Inc. Operations have been financed primarily from cash on hand from the sale of common shares.

As of December 31 2004 we had working capital of $800,324 compared to $1,567,254 at June 30, 2004. Net cash used for operations during the six months ended December 31, 2004 was $732,469 (2003 - $532,657). The decrease in working capital was largely due to a decrease in cash of $1,030,940, repayments of the credit line of $96,151 and increases in accounts receivable and other assets of $24,153 and $62,315, respectively. As of December 31 2004 our current liabilities were $673,504 compared to $850,283 at June 30, 2004. Of the amounts owed by us December 31 2004, a total of $138,320 ($230,726 at June 30 2004) was due to related parties.

-24-

Net cash used for operations during the six months ended December 31 2004 was $732,469 (2003 - $532,657). Capital assets of $12,506 were acquired during the period (2003 - $6,681). Operations and capital additions were funded from cash on hand ($1,561,020), payment received on Note receivable ($71,090), and proceeds from exercise of stock options of $147,293.

As of December 31 2004, our Company's total assets were $2,029,695. This compares with our Company's assets of $3,053,936 at June 30, 2004. The decrease in our total assets was primarily attributable to loss from operations.

Until the Company is able to finance itself through profitable operations it will continue to rely on cash on hand, advances from related parties and equity issues.

Critical Accounting Policies

The Company's discussion and analysis of its financial condition and results of operations are based upon the financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements require management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures on the date of the financial statements. On an on-going basis, the Company evaluates its estimates, including, but not limited to, those related to revenue recognition. The Company uses authoritative pronouncements, historical experience and other assumptions as the basis for making judgments. Actual results could differ from those estimates. Critical accounting policies identified are as follows:

Long-Lived Assets

In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life.

Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.

Foreign Currency Transactions/Balances

The Company's reporting currency is the U.S. dollar and its functional currency is the Canadian dollar. Occasional transactions occur in U.S. dollars, and management has adopted SFAS No. 52, "Foreign Currency Translation". Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at rates of exchange in effect at the balance sheet date. Average rates for the year are used to translate revenues and expenses. Resulting translation gains and losses are accumulated in a separate component of stockholders' equity as accumulated other comprehensive income or loss.

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Stock-Based Compensation

The Company has elected to apply the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB25). Under the intrinsic value method of accounting, compensation expense is recognized if the exercise price of the Company's employee stock options is less than the market price of the underlying common stock on the date of grant. Stock-based compensation for employees is recognized on the straight-line basis over the vesting period of the individual options. Stock options granted to non-employees are accounted for under Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS 123), which establishes a fair value based method of accounting for stock-based awards, and recognizes compensation expense based on the fair value of the stock award or fair value of the goods and services received, whichever is more reliably measurable. Under the provisions of SFAS 123, companies that elec t to account for stock-based awards in accordance with the provisions of APB 25 are required to disclose the pro forma net income (loss) that would have resulted from the use of the fair value based method under SFAS 123.

Revenue Recognition

The Company's C-Chip technology is still in the development stage and has generated limited commercial sales of products. The Company developed prototypes for testing by potential customers, which were billed for a portion of the costs incurred. The Company recorded these cost recoveries when paid as a credit to the respective expense in the statement of operations. Commercial product sales are recorded when shipped as part of a sales agreement, usually by customer purchase order. Certain product sales contain a small charge for after sales service for up to one year; such amounts are deferred and recognized as revenue when earned. Products carry a one-year replacement warranty and there is insufficient warranty experience on which to establish a warranty reserve during the development stage.

Sales of security services commenced on the acquisition of Canadian Security Agency (2004) Inc. during fiscal 2004. Clients are provided ongoing personnel and products based upon service agreements with revenue recognized as services are performed.

The Company continually monitors timely payments and assesses any collection issues. The allowance for doubtful accounts is based on the Company's detailed assessment of the collectibility of specific customer accounts. Any significant customer accounts that are not expected to be collected are excluded from revenues.

The Company recognizes revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue Recognition in Financial Statements." Revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectibility is reasonably assured.

Purchased Intangible Assets

An acquired intangible asset that represents technology that has reached technological feasibility is capitalized at cost. Amortization is calculated using the straight-line method over four years commencing in the first quarterly period following acquisition. Acquired in-process research and development is charged to operations on acquisition.

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Recent Accounting Pronouncements

In December 2004, FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29". The guidance in APB Opinion No. 29, "Accounting for Nonmonetary Transactions", is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. SFAS No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Early application is permitted and companies must apply the standard prospectively. The adoption of this standard is not expected to have a material effect on the Company's results of operations or financial position.

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123R, "Share Based Payment". SFAS 123R is a revision of SFAS No. 123 "Accounting for Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees" and its related implementation guidance. SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123R does not change the accounting guidance for share-based payment transactions with parties other than employees provided in SFAS 123 as originally issued and Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services". SFAS 123R does not address the accounting for employee share ownership plans, which are subject to AICPA Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans". SFAS 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period (usually the vesting period). SFAS 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instrument s issued. The scope of SFAS 123R includes a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Public entities (other than those filing as small business issuers) will be required to apply SFAS 123R as of the first interim or annual reporting period that begins after June 15, 2005. Public entities that file as small business issuers will be required to apply SFAS 123R in the first interim or annual reporting period that begins after December 15, 2005. For nonpublic entities, SFAS 123R must be applied as of the beginning of the first annual reporting period beginning after December 15, 2005. The adoption of this standard is not expected to have a material effect on the Company's results of operations or financial position.

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ITEM 3.     CONTROLS AND PROCEDURES

Quarterly evaluation of our disclosure controls and internal controls

Within the 90 days prior to the date of this quarterly report on Form 10-QSB, we evaluated the effectiveness of the design and operation of our "disclosure controls and procedures" (Disclosure Controls), and our "internal controls and procedures for financial reporting" (Internal Controls). This evaluation (the Controls Evaluation) was done under the supervision and with the participation of our management, including our chief executive officer (CEO) and chief financial officer (CFO). Our CEO performs the same functions as a principal executive officer and our CFO performs the same functions as a principal financial officer. Rules adopted by the SEC require that in this section of the quarterly report we present the conclusions of our CEO and our CFO about the effectiveness of our Disclosure Controls and Internal Controls based on and as of the date of the Controls Evaluation.

CEO and CFO certifications

Appearing immediately following the signatures section of this quarterly report there are two separate forms of "Certifications" of the CEO and the CFO. The first form of Certification is required in accord with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certification). This section of the quarterly report which you are currently reading is the information concerning the Controls Evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

Disclosure controls and internal controls

Disclosure Controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (Exchange Act), such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's (SEC) rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Internal Controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting p rinciples.

Limitations on the effectiveness of controls

Our management, including our CEO and CFO, confirm that the control systems are at the "reasonable assurance" level, however, management does not expect that our Disclosure Controls or our Internal Controls will prevent all error and all fraud as a control system. No matter how well conceived and operated, they cannot provide absolute assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can

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be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. However, upon discovery that the controls are inadequate, they will be changed.

Scope of the controls evaluation

Our CEO/CFO evaluation of our Disclosure Controls and our Internal Controls included a review of the controls' objectives and design, the controls' implementation by us and the effect of the controls on the information generated for use in this quarterly report. In the course of the Controls Evaluation, we sought to identify data errors, controls problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. This type of evaluation will be done on a quarterly basis so that the conclusions concerning controls effectiveness can be reported in our Quarterly Reports on Form 10-QSB and Annual Report on Form 10-KSB. Our independent auditors in connection with their audit and review activities also evaluate our Internal Controls on an ongoing basis. The overall goals of these various evaluation activities are to monitor our Disclosure Controls and our Internal Controls and to make modifications as necessary; our intent in this regard is that th e Disclosure Controls and the Internal Controls will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant.

Among other matters, we sought in our evaluation to determine whether there were any "significant deficiencies" or "material weaknesses" in our Internal Controls, or whether we had identified any acts of fraud involving personnel who have a significant role in our Internal Controls. This information was important both for the Controls Evaluation generally and because items 5 and 6 in the Section 302 Certifications of the CEO and CFO require that the CEO and CFO disclose that information to our Board's Audit Committee and to our independent auditors and to report on related matters in this section of the quarterly report. In the professional auditing literature, "significant deficiencies" are referred to as "reportable conditions"; these are control issues that could have a significant adverse effect on the ability to record, process, summarize and report financial data in the financial statements. A "material weakness" is defined in the auditing literature as a particularly serious reportable condition wh ere the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the financial statements and not be detected within a timely period by employees in the normal course of performing their assigned functions. We also sought to deal with other controls matters in the Controls Evaluation, and in each case if a problem was identified, we considered what revision, improvement and/or correction to make in accord with our on-going procedures.

In accord with SEC requirements, our CEO and CFO note that, since the date of the Controls Evaluation to the date of this Quarterly Report, there have been no significant changes in Internal Controls or in other factors that could significantly affect Internal Controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

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Conclusions

Based upon the Controls Evaluation, our CEO and CFO have concluded that, our Disclosure Controls are effective to ensure that material information relating to us and our subsidiary is made known to management, including our CEO and CFO, particularly during the period when our periodic reports are being prepared, and that our Internal Controls are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with generally accepted accounting principles.

PART II

ITEM 2.     CHANGES IN SECURITIES

No securities were sold by us without registration during the period from September 30, 2004 to December 31, 2004:

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

a)	Exhibit No.	Document
	31.1	Certification of Principal Executive Officer pursuant to Rule 13a-15(e) and Rule 15d-15(e), promulgated under the Securities Exchange Act of 1934, as amended
	31.2	Certification of Principal Financial Officer pursuant to Rule 13a-15(e) and Rule 15d-15(e), promulgated under the Securities Exchange Act of 1934, as amended
	32.1	Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
	32.2	Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002 (Chief Financial Officer)

b)   Reports on Form 8-K

The following reports on Form 8-K were filed during the quarter:

On the 13^th day of October, 2004, we reported the results for the fiscal year ended June 30, 2004.

On the 22^nd day of October, 2004, we reported Claude Pellerin resigned from C-Chip Technologies Corp. as Vice-President of the company.

On the 12^th day of November, 2004, we reported that we have entered into a Letter of Intent with Broadfield Partners to form a comprehensive alliance for the distribution of C-Chip products in Europe.

On the 24^th day of November, 2004, we reported the security solutions attracted significant interest at the SEMA show (Specialty Equipment Market Association) held in Las Vegas November 2 through November 5.

On the 24^th day of November, 2004, we reported results for the first quarter ended September 30, 2004.

On the 3^rd day of December, 2004, we reported we have entered into a strategic partnership with Rent Centric, Inc., a leader in the provisioning of software solutions to the car rental industry.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 22^nd day of February 2005.

C-CHIP TECHNOLOGIES CORPORATION
(Registrant)
BY:	/s/ Stephane Solis
	Stephane Solis, President, Principal Executive Officer and a member of the Board of Directors
BY:	/s/ Benjamin Leboe
	Benjamin Leboe, Principal Financial Officer

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